November 15, 2010

Appeals Court Struggles With 'Red Flags Rule'

A federal appeals court in Washington wrangled today with the definitions of "credit" and "any person" as it tried to determine whether the Federal Trade Commission overstepped its authority in regulating the legal profession.

The panel's three judges asked skeptical questions of both lawyers in a case between the FTC and the American Bar Association. The ABA sued the FTC on behalf of lawyers trying to win an exemption from the “Red Flags Rule,” a new regulatory scheme designed to prevent identity theft among creditors. The ABA won a lower court ruling in December 2009.

As The National Law Journalreported last week, the case involves the broader question of when the federal government can regulate lawyers. But also central is a 2003 federal law covering any person who extends credit, a phrase that FTC lawyers interpret to include some lawyers who receive payment only after providing services to a client.

“Lawyers are no different — though they might think they are — from other service providers,” FTC attorney Michael Bergman told the U.S. Court of Appeals for the D.C. Circuit.

Judge Thomas Griffith echoed that argument at several points, discounting the ABA’s argument that Congress must be explicit when it intends to regulate the legal profession because the industry is the longtime province of states.

“They have to say, ‘This covers lawyers, as well’?” Griffith asked Proskauer Rose partner Mark Harris, who represented the ABA. Griffith suggested such language might be superfluous when a law covers any person. “It’s not as though this is a group that is unaware of the legal profession,” he said, referring to members of Congress.

Judge Judith Rogers also said the law could be read as unambiguous in covering everyone. “It doesn’t say, ‘anyone who extends credit, other than lawyers,’” she said.

Yet Rogers suggested that the issue might not be ripe for decision because the FTC has not had a chance to enforce its rules. “Why isn’t that the kind of statute that’s begging for an as-applied challenge?” she asked Harris. He responded by citing earlier cases, including a 2005 case in the D.C. Circuit, that he said make clear lawyers have a special status in federal regulations.

Senior Judge Harry Edwards was less receptive to the FTC’s argument, asking Bergman at one point to assume that he had lost his argument that the FTC has clear authority under the 2003 law to regulate lawyers. Edwards asked, would it still be possible to enforce the Red Flags Rule against lawyers? Bergman replied that it would be, because there are no anti-identity-theft regulations at any state bar that would conflict with the federal rules.